Altaba, formed to unload Yahoo’s stake in Alibaba (NYSE:BABA), is bringing its remaining shares to market.
It could be your last chance to get in.
That’s why shares in the Chinese cloud giant fell in pre-market trading over the three-day weekend. They opened Jan. 21 at $222.45, down almost 2% from their Friday close. The market capitalization stood just under $600 billion, with a price-to-earnings ratio of 64. It was selling for almost 9 times revenue.
It’s a good time for Altaba to get out, but it could also be a good time for long-term U.S. investors to buy. That’s because the future of Alibaba looks so good you need shades.
While Alibaba is usually compared with Amazon (NASDAQ:AMZN) because of its dominance in Chinese e-commerce, its cloud is even more powerful.
Imagine if Salesforce (NYSE:CRM) owned Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and PayPal (NASDAQ:PYPL)? That’s Alibaba’s cloud. It doesn’t just sell infrastructure or a platform. It is offering a complete suite of business applications, integrated into China’s commercial mainstream. The company calls this the Alibaba Business Operating System (ABOS).
It’s an irresistible combination in Southeast Asia, where Alibaba is now the second-leading cloud provider. While it’s fourth in the infrastructure and platform markets, that’s not where its power lies. It’s in applications, the top of the cloud stack, where Alibaba is playing best.
Because Alibaba is Chinese, it is able to scale at things American companies can barely attempt. These include artificial intelligence, machine-based manufacturing and machine-to-machine communication. Things that freak out American tech reporters, like self-driving cars or facial recognition, are reality in Alibaba’s home city of Hangzhou.
Alibaba’s cloud expansion stalled a little in 2019, but investment is now picking up again. Cloud operators like Alibaba now represent one-third of all spending on data center hardware and software. It’s why the five U.S. cloud leaders — Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet, Amazon and Facebook (NASDAQ:FB) — enter 2020 worth about $5.3 trillion.
The AliExpress digital marketplace and Alipay payment system are camels with noses under the tent of American cloud dominance.
Alipay is getting in through Chinese tourists who make one-third of their purchases with mobile apps. Ant Financial, which remains under the control of Alibaba but is a separate company, is raising money at a valuation of $200 billion.
In the U.S. it’s business-to-business processing that’s the nose under the tent. This is the niche Alibaba began with, in 1999.
The Bottom Line on Alibaba Stock
I have been pounding the table about Alibaba for years. I first bought shares in late 2016. Then I sold for a fat profit early in 2019, and got back in. Now I’m well ahead again.
I have been emphasizing the differences between Alibaba and Amazon throughout that time. Alibaba is well ahead of Amazon in not holding retail inventory, making it the most profitable big company in the world.
Because Alibaba is Chinese, it can do all the innovation in fintech, artificial intelligence and application integration it wants. It doesn’t have to worry about government interference so long as it remains loyal, and it is.
That makes Alibaba a key holding, not just for this year, but for this decade.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, AMZN, MSFT and BABA.